What Is Happening At Zappos?

When Tony Hsieh won the prestigious ACM Programming Contest in 1993, you just knew he was going to do something great with his life. Check out the problem set he and his two teammates had to solve, and you get an acute understanding of just how smart he is.

Three years later, he founded LinkExchange -- an online advertising network incorporating the use of banner ads -- and promptly sold it to Microsoft in 1998 for $265 million. Not too shabby.

After selling LinkExchange, Tony founded an incubator and investment firm with his friend Alfred Lin (called Venture Frogs), where one of the first investment bets made was on a little online shoe selling company you might have heard of.

It's called Zappos.

A couple of months later, the uber smart 27-year old Hsieh joined the company as its CEO and, well, the rest is history.

Today, Zappos is a wholly owned subsidiary of Amazon (having been acquired for $1.2 billion in 2009) and its roughly 1,500 employees, headquartered in Las Vegas, produce in excess of $2 billion in revenues annually. The company diversified its portfolio and now sells not only shoes, but all sorts of clothing for men, women and children.

But how does this company, with less than 2,000 employees, continue to dominate the mainstream and social media headlines? After all, there are many other companies selling clothes and shoes online. Why does Zappos seem as though it has a stranglehold on press hits and mentions?

In a word, it's all about "culture."

Zappos is famous for establishing the bar when it comes to putting its customers first, aided and abetted by an engaged and happy workforce. The company has seemingly defined the causal link between a happy workforce and an equally balanced "purpose with profit" bottom line. The company's tagline and overarching ethos is to "Deliver Wow" and since 1999, it has done so in spades, serving millions of customers across the globe. Barry Glassman does a fantastic job on FORBESdescribing the client experience at Zappos.

I visited Zappos' headquarters earlier this year, partaking in a walkabout at their new downtown Las Vegas facilities. As you enter the building you're inundated with "hellos." Everywhere you look, people are smiling and when your eyes intersect theirs, it's the friendliest smile you've ever received. In one corner, someone is playing a ukulele. In another, people mingle about in a conference room that is literally blinking with fun, coolness and family-like values.

Their collaborative mindset is infectious, one that encourages everyone to scale the culture. Positivity is ubiquitous. It's not up to Tony or any singular team to "deliver wow"; it's the responsibility of every Zappos team member. For example, every employee is given the opportunity to issue a $50 "co-worker bonus award" each month to one of their deserving colleagues. It's an act of recognition, but it's the opportunity for all Zappos employees to scale the culture. Employees are limited to sending one award per month, but there is no limit on the number of monthly awards an employee can receive.

Culture can grow in other ways, too. The cafeteria is a great example. Instead of the "Z Cafe" being simply a place to order food and grab a cappuccino, the company placed its "Mainframe Zappos Tech Support" center in the middle of "Z Cafe," not banishing it to the basement where many other organizations house similar IT outfits.

Zappos also takes their role in the community very seriously. On Thanksgiving, 2014, the company opened its doors and fed over 1,000 Las Vegas families, also giving away shoes and socks to anyone that needed a new pair. It doesn't have to, but the company's financial and time contributions help foster a culture that is putting purpose alongside profit.

Operationally, approximately 600 of the employees are part of CLT - Customer Loyalty Team - where they answer between 5,000 and 10,000 calls, emails and webchat sessions every day. So that everyone knows what it likes to "deliver wow," every single employee will contribute 10 hours of time to the CLT each year. This culture building act helps to absorb increased contact time requirements during the busy holiday seasons but it also helps those in non-call-center roles to reengage with the customer and those in the CLT itself.

Overall, Zappos has an outstanding retention record, particularly given more than one-third of the employees are CLT agents solving customer problems and taking sales orders.

When I asked my Zappos tour guide about exit statistics at the company, only 13% leave Zappos on a voluntary basis annually, whereas 7% are let go on an involuntary basis for various reasons. That works out to about 300 new Zappos employees being hired on an annual basis, and amazingly, there are over 30,000 resumes submitted each year to Zappos recruitment for those 300 roles. Clearly the company's culture is not only doing wonderful things for its long-standing employees, customers and the community, it has infiltrated the lexicon of everyday people such that 30,000 people a year put their hand up and say, "Can I please please please work at Zappos."

Wow!

But recently, the company has been creating headlines that run somewhat counter to its first decade and half of existence. The "wow" has begun to feel a bit like "oh wow"--and not in a good way.

We can trace some of the troubling headlines and anecdotes to the company's recent transition to an organizational design model known as Holacracy®.

Holacracy?

Yes, the registered trademark symbol is necessary. Crazy as it sounds, Holacracy -- as an organizational design model -- is trademarked (irony point one).

In a nutshell, Holacracy is an organizational structure — initially devised by self-described “recovering CEO” Brian Robertson of HolacracyOne — that purports to do the following:

Holacracy is a distributed authority system – a set of “rules of the game” that bake empowerment into the core of the organization. Unlike conventional top-down or progressive bottom-up approaches, it integrates the benefits of both without relying on parental heroic leaders. Everyone becomes a leader of their roles and a follower of others’, processing tensions with real authority and real responsibility, through dynamic governance and transparent operations.

Holacracy is depicted as a way to operate an organization without the classic "command and control" dogma found in many of today’s organizations. I think anyone would be a fan of eliminating "command and control," so there are merits to the model simply on that basis alone.

At the end of 2013, Zappos CEO Tony Hsieh (never one to remain stagnant with the organization - and always trying to ensure the Zappos culture is pushing the ways in which to "deliver wow") held a town hall meeting to inform the fine folks who work there that their current organizational structure was being tossed in favour of Holacracy by the end of 2014. The company ran a pilot in 2013 with 150 or so employees. It worked so well Tony decided to (eventually) scrap his CEO title and all Zappos employees would do the same with their own titles under Holacracy.

Even Twitter co-founder Evan Williams has implemented Holacracy at his new(ish) venture, Medium.

But for Zappos, things seem to have become a wee bit complicated in the full adoption of Holacracy. On the surface, it doesn't look as though everyone is welcoming the new organizational operating model.

As the Holacracy pilot concluded at Zappos, the "new" organizational model was to be fully implemented to begin the 2015 year. Some three months into 2015, however, Tony issued a 4,552 word email to Zappos employees that contained three main messages:

We aren't where we should be with the shift to Holacracy;

We aren't giving up on Holacracy - in fact, we're doubling-down on our efforts;

If you're not on the Holacracy bus by April 30, get out.

What's puzzling to me (irony point two) is that Tony had to issue the email at all.

Wasn't this the culture of an organization that everyone wants to work at?

Wasn't this the culture of an organization where customers consistently rave about their "wow" experiences?

Wasn't this the culture of an organization that equally serves purpose with profit, relentlessly focusing on the customer experience?

Quite simply, wasn't this the culture of an organization that had figured out the link between an engaged workforce and a "purpose with profit" bottom line?

By April 30 (deadline day for those to get on the Holacracy bus), 210 Zappos employees took up Tony's new "offer" and accepted a severance package of at least three months in wages as well as benefits.

To put things into perspective, 14% of the Zappos workforce left on April 30, essentially matching their annual voluntary attrition rate in one day. I don't know about you, but when 14% of my organization leaves in one day, there is something amiss if not awry. When I was on my tour at Zappos earlier in 2015, I brought up Holacracy on several occasions with various employees I came into contact with. "Change is good," was often cited but you could smell the awkwardness that Holacracy was causing. (And my experience at Zappos was several weeks before Tony's long email.)

The organization seems nonplussed about the number of exits. John Bunch, the Zappos employee who is leading the company's transition to Holacracy said, “Whatever the number of people who took the offer was the right number as they made the decision that was right for them and right for Zappos.”

Through the use of several case studies, Laloux works his way through a series of organizational structures which, in his view, are representations of different and historical organizational designs. Each type has been branded as a colour.

For example, a "Red" organization (what he also coins "impulsive") was formed some 10,000 years ago, one that is led by a "power chief" who is ruthless and uses fear as the motivating glue in all operations. Authority in this case is very commanding, citing historical examples like tribes and more recent examples like the Mafia and street gangs as "Red" organizations. He used the wolf pack as a guiding metaphor to depict these types of firms.

A "Green" organization (coined "pluralistic" by Laloux) focuses on empowerment and values-driven culture. The guiding metaphor for a green organization as described by Laloux is "family." He even cites Zappos as a perfect example of a Green-pluralistic organization in the book (page 175).

But the crux of Laloux's thesis is that organizations should reinvent themselves toward a "Teal" colour -- the evolutionary model, as he describes. Evolutionary-Teal organizations reveal three breakthroughs:

Self-management: operate effectively with a system based on peer relationships, without the need for either hierarchy or consensus.

Wholeness: develop a consistent set of practices that invite us to reclaim our inner wholeness and bring all of who we are to work.

Evolutionary purpose: seen as having a life and sense of direction on their own -- members are invited to listen in and understand what the organization wants to become, what purpose it wants to serve.

Personally, I found the book to be reverse engineered. Dave Snowden went further, and referred to it as, "the most trivial management book I had read in a long time."

The case studies used did seem to define Laloux's so-called "Evolutionary-Teal" organization rather well, but self-management, wholeness and evolutionary purpose as a basis for business reeks of cultist cuteness, not an organizational design model that delivers both profit and purpose. Any organization looking to shift to "Teal" might want to first start with their existing operating culture.

What types of attributes are embedded into existing leadership practices and models? Should they be redefined? How do teams operate with one another? How do leaders treat their employees? Their customers? What systems and processes are in place to expedite ideation? What frameworks and technologies are used for employees to collaborate with one another?

It's no secret millions of employees remain disengaged, if not disenfranchised at their places of work. But for an organization to shift from "command and control" to "evolutionary-teal" misses the chance to create a more engaging, connected and collaborative organization with existing structures.

Moving from a very hierarchical and "command and control" environment to the Teal colour is not for the faint of heart. In terms of Laloux's book, I found it very difficult to envision companies in today's ultra-competitive and stock-market centered world to shift to such an operating model. Noble? Yes. Practical? Not at all.

This brings me back to Zappos.

Tony Hsieh mentioned in his long email to employees that he had discussed the book with the Reinventing Organizations author himself over a Skype call. He encapsulates his discussion with Laloux into two main points, as a basis for introducing Holacracy and self-based management. The first centers around pressure:

We need to figure out what the antibodies are for when a small number employee take advantage of the freedom gained from being in a no-manager organization, or else it will demoralize the other employees. He [Laloux] said that in general, research has shown that peer-pressure based systems work the best. For certain types of job functions where there are easy metrics to measure performance, a public leaderboard ranking will naturally create peer pressure by showing which teams are performing and which aren’t.

If I'm reading between the lines, in order to successfully implement Holacracy, the organization has to simultaneously introduce a public shaming system (akin to wearing a Scarlet Letter) so employees feel the pressure to perform.

That seems rather odd to me. I don't see it in any way, shape or form as 'culture building'. In fact, I think it's the exact opposite.

The second point Tony addresses in his conversation with Laloux centers around conflict resolution:

Conflict resolution starts with the expectation that employees are responsible for taking the first step and having a 1:1 conversation with whomever they are having a conflict with (instead of going to their manager for example). He [Laloux] said the most important thing is the need to have a strong conflict resolution process clearly communicated and clearly understood by everyone so employees know what to do.

That seems sensible to me, but what happens when it involves some form of harassment? Or what if an employee isn't pulling his weight in the call center (e.g. Jim never volunteers for the call-center shifts on Thanksgiving or Christmas Eve) and claims it's his right to work whenever he feels like it?

But what I don't fully understand revolves around the point of motive. What was the motive of Zappos (or Tony) to shift toward Holacracy and a completely self-managed operating structure in the first place? Were there operating processes that were inhibiting Zappos' quest to "deliver wow"? Were there struggles in their distribution channels, marketing plans, Customer Loyalty Team efforts or elsewhere that aren't documented?

Did the company feel as though the culture was suffering, and thus a reinvention was necessary?

Perhaps there is a clue in the closing words of Tony's email:

Like all the bold steps we’ve done in the past, it feels a little scary, but it also feels like exactly the type of thing that only a company such as Zappos would dare to attempt at this scale.

If an organization decides to become self-organizing -- where peer-to-peer coaching is the organizational model, meetings are ad hoc, voluntary task forces comprise the operating mechanism and decisions are fully decentralized -- does it make sense to issue a 4,552 word edict, forcing those employees who have helped to build up the "deliver wow" culture over time to leave the very place they've called their professional home?

In essence, is it "change for the sake of change" or is there some underlying business reason for the shift?

In defense, Zappos did release a statement on April 8, 2015 indicating "Holacracy is one of the many tools we plan on using to reach our destination," and "our true journey is to becoming a fully self-managing organization that culminates in making our work more productive, fulfilling and meaningful."

There isn't a single employee on the planet who doesn't yearn for a more "productive, fulfilling and meaningful" place of work, but I wonder aloud whether the hierarchical decision to enforce Holacracy isn't (irony point three) potentially ruining the great culture that was carefully constructed over its relatively short tenure.

Will the company continue to 'wow' us all?

I know I'm going to watch eagerly in anticipation that Tony Hsieh -- winner of the ACM Programming Contest in 1993 -- will prove us all wrong, once again.

I hope his "bet everything on Holacracy" decision works out for him, Zappos and the customers it serves.

I am the author of THE PURPOSE EFFECT: Building Meaning in Yourself, Your Role and Your Organization and FLAT ARMY: Creating a Connected and Engaged Organization. My next book, OPEN to THINK, will publish September 11, 2018. I’m also chief envisioner of TELUS Transformation...